SoftBank Shares Plunge as AI Stock Concerns Mount

SoftBank Group shares (9984.T-JP) experienced a sharp decline on Friday, mirroring a broader sell-off in AI-related stocks as investor sentiment turned cautious amidst concerns over inflated valuations within the sector. The conglomerate, with its expansive portfolio of AI investments spanning infrastructure, semiconductors, and application development firms, witnessed its stock price plummet by over 8% during the trading session.

This recent downturn follows a period of volatility for SoftBank, which included a near 3% gain in the previous session, preceded by a significant 10% drop on Wednesday – the company’s worst single-day performance since April. If Friday’s losses are sustained, SoftBank is poised to erase approximately $53 billion from its market capitalization this week, marking its most substantial weekly loss since the market turmoil of March 2020. The question on investors’ minds: is this a market correction or the beginning of a deeper trend?

According to David Gibson, senior research analyst at MST Financial, “SoftBank Group’s shares are falling as many bought it as the only listed proxy for OpenAI.” This perspective highlights the market’s tendency to treat SoftBank as a bellwether for the AI industry’s prospects, making it particularly vulnerable to shifts in investor confidence.

Gibson further elaborated that the current pullback reflects an increasing level of skepticism towards the AI sector. Investors are exhibiting a growing awareness that many of OpenAI’s much-touted partnerships remain tentative, lacking concrete agreements and facing uncertain funding scenarios. This realization is forcing a reassessment of the valuations of companies, like SoftBank, that are heavily invested in the AI ecosystem.

Adding to the uncertainly, recent reports indicate that OpenAI CEO Sam Altman has engaged in discussions with the U.S. government regarding potential federal loan guarantees to incentivize the construction of domestic chip manufacturing facilities. These discussions, coming on the heels of statements by OpenAI’s CFO suggesting the company’s desire for federal assistance in securing chip financing, underscore the capital-intensive nature of AI development and the potential reliance on government support for sustained growth. The reliance on public funding streams raises questions about the long-term sustainability and true economic viability of certain AI ventures.

SoftBank’s exposure to the AI market is further amplified by its significant stake in Arm Holdings, a U.K.-based semiconductor design company whose technology underpins many of the world’s mobile and AI processors. The performance of Arm shares on the Nasdaq is closely watched as an indicator of sentiment towards the broader AI chip market. Overnight, Arm shares (ARM) edged down 1.21%, contributing to the overall negative trend.

Adding fuel to the fire, recent unconfirmed reports indicated that SoftBank explored a potential acquisition of U.S. chipmaker Marvell Technology Inc. (MRVL) earlier in the year. This strategic move was allegedly aimed at bolstering Arm’s capabilities and market position. While the deal ultimately did not materialize, the reports further highlight SoftBank’s aggressive pursuit of growth opportunities within the competitive semiconductor landscape and its willingness to engage in large-scale transactions.

The ripple effects of the AI sector’s correction extended beyond SoftBank, impacting other prominent Japanese technology stocks. Advantest (6857.T-JP), a major manufacturer of semiconductor testing equipment, saw its shares plummet by over 6%. Renesas Electronics, a key player in the chipmaking industry, experienced a decline of nearly 4%. Tokyo Electron (8035.T-JP), a leading supplier of chip production equipment, also faced downward pressure, with its stock price falling by 1.46%.

Even the world’s largest chipmaker, TSMC (TSMC3′-BR), was not immune to the market’s apprehension, as its shares dipped by 0.6%. This widespread decline underscores the interconnectedness of the global semiconductor supply chain and the sensitivity of the entire technology sector to shifts in investor sentiment.

Furthermore, suppliers to Nvidia, a company often seen as the standard-bearer for AI-driven growth, also felt the impact. SK Hynix (SSNLF), a key provider of memory chips to Nvidia, was down over 1%, while its South Korean competitor, Samsung, experienced a 0.5% decline. These movements suggest that even companies directly benefiting from the AI boom are facing increased scrutiny and market volatility.

The negative trend in Asian tech stocks mirrored a similar downturn among AI-related companies in the U.S. the previous day. Qualcomm (QCOM) witnessed a drop of almost 4% despite reporting strong quarterly results, due to concerns about potentially losing future business from Apple. AMD (AMD), which had performed strongly earlier in the week, slipped by 7%. Palantir (PLTR) and Oracle (ORCL) also experienced significant declines, falling by approximately 7% and 3%, respectively. Even market giants like Nvidia (NVDA) and Meta Platforms (META) closed lower, demonstrating the breadth and depth of the AI correction.

The rapid ascent of AI has ignited concerns about a potential tech bubble, evoking comparisons to the dot-com era of the late 1990s. Critics argue that the valuations of many AI companies have become detached from realistic profit projections, mirroring the irrational exuberance that characterized the previous tech bubble. This raises the critical question of whether current market prices accurately reflect the underlying fundamentals of these companies or if they are instead driven by speculative fervor.

Despite the current market jitters, some experts maintain a more tempered outlook. Laura Cooper, global investment strategist at Nuveen, acknowledges the undeniable economic impact of AI and the inevitability of market fluctuations. However, she argues that “it’s too soon to call a bubble. Today’s AI capex is being funded largely by cash-rich firms with solid balance sheets, not cheap credit or speculation.” Cooper suggests that the greater risk lies not in a bursting bubble, but in “valuation fatigue — investors tiring of paying ever-richer premiums for AI returns that don’t materialize quickly enough.” This perspective suggests that the market may be undergoing a period of consolidation and reassessment, rather than a catastrophic collapse.